Bloomberg News

Norway Keeps Main Rate Unchanged as Euro Crisis Deepens

June 20, 2012

Norway’s central bank left its main interest rate close to a record low for a second meeting as policy makers try to protect the world’s third-richest economy per capita from the fallout of Europe’s deepening debt crisis.

The overnight deposit rate was held at 1.50 percent, the Oslo-based bank said today. The move was forecast by all 18 economists surveyed by Bloomberg. The bank cut rates by 0.75 percentage point over two meetings in December and March.

The analyses “imply a key policy rate at about today’s level towards the end of 2012,” Governor Oeystein Olsen said in a statement. “Thereafter, the key policy rate is projected to rise gradually towards a more normal level. However, there is considerable uncertainty surrounding economic developments.”

Policy makers are putting concerns that Europe will fail to tame its debt crisis ahead of the risk that low rates will overheat the domestic economy. Finance Minister Sigbjoern Johnsen urged euro-zone leaders this month to step up efforts to end the turmoil as bank funding comes under pressure. His government has also pledged to rein in spending in an effort to keep credit growth in check amid speculation Norway may be in the grip of a housing bubble.

Krone Gains

The krone rose 0.5 percent to 7.502 per euro, while the country’s benchmark three-year yield rose five basis points to 1.45 percent as of 2:08 p.m.in Oslo

Norwegian policy makers raised their forecast for the rate to 1.57 percent by March, from an earlier forecast of 1.50 percent. The estimate for where the rate will be in June was increased to 1.69 percent from 1.54 percent.

According to Gizem Kara, an economist at BNP Paribas SA, the forecast puts the bank in line to raise rates in the first quarter.

“Unless there is a significant increase in uncertainty regarding developments in the eurozone, the risk to this view is if domestic economic conditions strengthen more than we expect,” Kara said in a note. “This could more than offset the impact of a strong krone on inflation and lead to a further increase in inflationary pressures than we currently envisage. In this case, the Norges Bank would start its hiking cycle earlier, in the fourth quarter this year.”

Accelerating Growth

As the euro zone slides into a recession, Norway’s economic growth is accelerating thanks to record investments in its offshore oil and gas fields. Low borrowing costs and falling unemployment have fueled consumption and household borrowing. Consumer confidence rose to a 12-month high this quarter, while home prices rose an annual 7 percent last month, and are up almost 30 percent since 2008.

The bank today said it expected the mainland economy, excluding oil and gas output, to grow 3.75 percent this year and 3.25 percent next year, up from March forecasts of 3.25 percent and 3 percent, respectively. Consumer prices will rise 1 percent this year and 1.75 percent next year.

European Central Bank President Mario Draghi, who has cut the bank’s benchmark to a record-low 1 percent, said June 6 that “a few” policy makers on his board called for a cut, fueling speculation the ECB may act as soon as next month.

The crisis in the 17-member currency union will feed through to the Norwegian economy through weaker exports and financial market turbulences, Johnsen said this week, adding there is “large uncertainty.”

Policy makers in Norway have emphasized their reluctance to widen the rate gap to Europe. A bigger difference would attract investors to the krone, which would raise the price of exports and keep inflation below the bank’s 2.5 percent target. Inflation has stayed below that target since July 2009.

The krone has weakened 1 percent against the euro since March 13, the day before the bank’s last rate cut. It reached a nine-year high against the euro earlier that month.

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net


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